The key event of last week was the July meeting of the Federal Reserve.

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he Fed did not deviate from its script and intimated that a balance sheet reduction is around the corner. However, it did nothing to dispel the uncertainty over the possibility of further hikes in 2017 and the currency markets took that as a dovish sign. The collapse of the Republican effort to repeal President Obama’s healthcare reforms further pressured the Dollar, which fell against every other G10 currency with the exception of the Swiss Franc. The latter had its worst week in years as wave after wave of stop losses were triggered on rumors of future foreign acquisitions by Swiss companies.

This will be an unusually busy week for currency markets. The Reserve Bank of Australia meets on Tuesday. On Thursday, the Bank of England meets and its Inflation Report is released. This should shed light on the timetable for possible rate hikes. From the US we will get the Fed’s preferred inflation measure, the Personal Consumption Expenditures deflator (PCE). To top this off, possibly the most critical single piece of economic data worldwide, the US payroll report, is released on Friday.

Major currencies in detail

GBP

Second-quarter growth in the UK just met modest expectations for a 0.3% increase, which leaves first-half growth at a fairly disappointing 1%.

This week’s MPC meeting provides the last big piece of information before the typical August languorous trading period. It will be interesting to see the reaction to the stagflationary data we have seen this year. With sluggish growth combined with upward surprise in inflation, markets expect a 6-2 split for unchanged rates. However, there is a risk that Andrew Haldane joins the hawks for a 5-3 vote, which would provide a noticeable boost to the Pound.

EUR

PMI indicators of business activity were softer than expected, albeit still strong and consistent with more than 2% growth. However, nothing could stand on the way of the Euro rally, which dragged upwards all other European currencies except the Swiss Franc.

Today we receive inflation data from the Eurozone, and this is the last market-moving news until September. Speculative bets in favour of the Euro reached another record last week, in another sign that the relentless Euro rally is becoming stretched.

USD

The market decided to take the Federal Reserve’s non-committal statement after its July meeting as a dovish sign. It announced that it is ready to begin the process of shrinking its balance sheet, hinting that the official statement will come at the September meeting. However, it did sound marginally more cautious in its assessment of inflation in the US. The key to future hikes in the US will be inflationary pressures and wages, rather than growth and job creation.

We do think that with the economy closer to full employment than anywhere else among the major economies, wages and inflation are likely to surprise against very subdued expectations. Second quarter GDP provided some confirmation of this view, as growth rebounded notably from the first quarter, and employment cost data for the same period provided the first upward surprise in inflation indicators for quite a while.